Page 1 GAO-14-334R – Pension Tax Incentives Update

441 G St. N.W.

Washington, DC 20548

March 20, 2014

The Honorable Ron Wyden

Chairman

Committee on Finance

United States Senate

Private Pensions: Pension Tax Incentives Update

Dear Chairman Wyden:

To encourage private-sector employers to sponsor pension plans and U.S. workers to save for 

retirement, federal law authorizes a variety of tax incentives for employer-sponsored pension

plans and other retirement savings vehicles. These tax incentives are structured to strike a 

balance between encouraging employers to start and maintain voluntary, tax-qualified pension 

plans and ensuring that lower-income employees receive an equitable share of the taxsubsidized benefits.1 For example, under current federal law, certain employer contributions to 

qualified pension plans, contributions made at the election of the employee through salary 

reduction, and income earned on pension assets are not taxed until distributed. Yet these tax 

deferrals come at a cost. The Joint Committee on Taxation has estimated that in fiscal year 

2014, the tax expenditures for such deferrals will result in the U.S. Treasury forgoing around

$100 billion in income taxes.

2

To prevent use of these tax incentives to subsidize excessively large pension benefits, 

legislation has been enacted to constrain the amount of tax-deferred contributions that can be 

made to tax-qualified pension plans. We issued reports in 20013 and 20114

 1 The Internal Revenue Code (IRC) establishes requirements that private pension plans must satisfy, including 

minimum coverage and benefits, in order to qualify for favorable tax treatment. Employers that sponsor these taxqualified plans are entitled to a deduction (within limits) for the contributions they make, and contributions are not 

included in an employee’s income until benefits are received. Small employers with fewer than 100 employees may 

also qualify for a federal tax credit for costs associated with starting a new pension plan. One important requirement 

for tax-qualified pension plans of private employers is that contributions or benefits be apportioned in a 

nondiscriminatory manner between highly compensated employees and other workers. See 26 U.S.C. §§ 401(a)(4), 

401(a)(5), and 414(q).

that, among other 

2 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017 (Washington, 

D.C.: Feb. 1, 2013).This estimate is based on provisions of federal tax law enacted through January 2, 2013. A tax 

expenditure is measured by the difference between tax liability under present federal law and the tax liability that 

would result from a recomputation of tax without benefit of the tax expenditure provision. The only larger individual tax 

expenditure in fiscal year 2014 is expected to be the exclusion of employer contributions for medical insurance 

premiums ($143 billion).

3 GAO, Private Pensions: Issues of Coverage and Increasing Contribution Limits for Defined Contribution Plans, 

GAO-01-846 (Washington, D.C: Sept. 17, 2001).

4 GAO, Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits, GAO-11-333 (Washington, 

D.C.: Mar. 30, 2011).
Page 2 GAO-14-334R – Pension Tax Incentives Update

things, examined the trends in plan formation and the characteristics of participants affected by 

the statutory limits for contributions to defined contribution (DC) plans.

5 A key source of data for 

these two previous reports was a survey on household finances conducted by the Board of 

Governors of the Federal Reserve System every 3 years. Following release of another 

installment of this survey, you asked us to update certain findings. Specifically, this report 

provides an update with respect to the following:

(1) the number of new pension plans that have been formed since 2009; and

(2) the income characteristics of plan participants affected by the statutory limits, and 

how they have changed over time.

For this update, we replicated the methodology that we used in our previous reports.

6 To 

examine recent trends in new and net private-sector plan formation, we analyzed annual filings 

data from the Department of Labor’s (DOL) Form 5500 database7 for plan years 2009 through 

2011—the most recent complete datasets available—and reviewed aggregate plan and 

participant counts included in the most recent Private Pension Plan Bulletin published by DOL in 

2013. As we did in our previous reports, we limited our analysis to examining private singleemployer pension plans with more than one participant. In addition, we vetted our methodology 

with officials from DOL and the Pension Benefit Guaranty Corporation (PBGC) to ensure that we 

obtained a reliable plan count.8

To examine trends in participant contribution levels and income characteristics of participants 

affected by the statutory limits on contributions to DC plans, we analyzed the most recent data 

from the Board of Governors of the Federal Reserve System’s triennial Survey of Consumer 

Finances (SCF), reflecting 2010 participant contributions to all DC plans (including both publicand private-sector plans).

9

 5 Pension plans are generally classified as either defined benefit (DB) or defined contribution (DC) plans. DB plans 

typically offer a fixed level of monthly retirement income based upon a formula specified in the plan (which often takes 

into account factors such as years of service and age at retirement), regardless of how the plan’s investments 

perform. In contrast, in DC plans, benefit levels depend on the contributions made to the plan and the performance of 

the investments in individual accounts, which may fluctuate in value over time.

As in our previous reports, we focused on contribution levels relative 

6 For a more detailed discussion of our data analysis, see GAO-11-333, pp. 44-49.

7 The Employee Retirement Income Security Act of 1974 and the IRC require administrators of pension and welfare 

benefit plans (collectively referred to as employee benefit plans) to file annual reports concerning, among other 

things, the financial condition and operation of plans. DOL, the Internal Revenue Service, and PBGC jointly 

developed the Form 5500 series so employee benefit plans could satisfy annual reporting requirements overseen by 

all three agencies.

8 DOL’s Employee Benefits Security Administration works to assure the security of the retirement, health and other 

employment-related benefits of America's workers and their families. PBGC is a government corporation established 

to protect the retirement incomes of more than 40 million American workers in more than 26,000 private-sector DB 

pension plans.

9 Our analysis of participant contribution levels and other characteristics examined a subpopulation of individuals who 

were deemed eligible DC participants in the SCF, meaning that they worked for a public or private employer who 

sponsored a DC plan in which they were eligible to participate. Estimated percentages based on all DC participants 

have 95 percent confidence intervals of plus or minus 1 percentage point or less. Percentage estimates based on 

participants contributing below the limits have 95 percent confidence intervals within plus or minus 3 percentage 

points of the percentage estimate itself. Percentages based on participants at or above the limits have confidence 

intervals within plus or minus 13 percentage points of the estimate itself.
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to statutory limits on the amounts that participants can contribute to DC plans on an annual 

basis.

10 The dollar limits for each of these limits has increased over time, as shown in table 1.

Table 1: Statutory Limits on Annual Participant Contributions to DC Plans, in Selected Years

Statutory limit 2001 2004 2007 2010 2014

Limit on elective deferrals 

26 U.S.C. § 402(g)(1) $10,500 $13,000 $15,500 $16,500 $17,500

Limit on catch-up contributions 

26 U.S.C. § 414(v)(2)(B)(i)

N/A 3,000 a 5,000 5,500 5,500

Limit on combined employer/participant contributions 

26 U.S.C. § 415(c)(1)(A) 35,000 41,000 45,000 49,000 52,000

Source: Internal Revenue Service publications.

 a N/A = not applicable. There was no catch-up contribution provision in 2001.

We conducted this performance audit from December 2013 through March 2014 in accordance 

with generally accepted government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our audit 

objectives.

Summary

From 2009 through 2011, the number of newly formed plans each year remained relatively flat, 

but below the levels reported previously for 2003 through 2007. Specifically, from 2009 through 

2011, private-sector employers sponsored about 81,000 new pension plans, including 75,000 

DC plans and 6,000 defined benefit (DB) plans (fig. 1). DC plans with fewer than 100 

participants accounted for about 90 percent of all new plan growth over this period. However, 

the net change in the number of pension plans over this period was negative, with the number 

of terminated plans more than offsetting new plan formation by nearly 34,000 plans (fig. 2). Over 

the 3-year span from 2009 to 2011, private-sector employers terminated about 106,000 DC and 

9,000 DB plans. Overall, there were about 52,000 fewer private single-employer pension plans 

in 2011 than there were in 2000 (fig. 3). Thus, while tax incentives from increased contribution 

limits may have spurred new plan formation, other events—such as company bankruptcies and 

consolidations stemming from the recent recession—may have discouraged it. Nevertheless, 

despite the overall decline in the number of plans, the total number of participants rose 

throughout the decade (fig. 4).

The percentage of DC participants affected by the 2010 statutory limits and their income 

characteristics were similar to what we reported previously for participants affected by the 2007

limits. In 2011, we reported that an estimated 5 percent of all DC participants who contributed to 

their plans in 2007 were affected by the statutory limits. Based on our analysis of the most 

recent SCF data, we estimate that about 6 percent of all DC participants who contributed to their 

 10 Other statutory limits include, for example, a limit on the amount of compensation ($260,000 for 2014) that can be 

taken into account in determining qualified pension plan contributions or benefits (26 U.S.C. § 401(a)(17)). There is 

also a statutory limit on the total amount of tax-deductible contributions that an employer may make to certain types 

of plans (26 U.S.C. §§ 404 and 4972). 
Page 4 GAO-14-334R – Pension Tax Incentives Update

plans in 2010 were affected by the statutory limits in that their annual contributions in 2010

reached or exceeded one or more of the three limits that we examined.

11

• About 3 percent were under age 50 and contributed at least $16,500 (the elective 

deferral limit).

Of this group:

• About 3 percent were aged 50 or older and contributed at least $22,000 (the combined 

elective deferral and catch-up contribution limits).

• Another one-tenth of 1 percent of all ages contributed at or above the combined 

employer-participant contribution limit of $49,000.

Participants affected by the 2010 statutory limits shared similar income characteristics with their 

counterparts in 2007. When compared with other DC participants who contributed below all of 

the 2010 statutory limits, this group had disproportionately higher earnings (90th percentile and 

higher) (fig.6) and were more likely to have additional assets (fig. 7) of greater average value in 

their households (table 3). In addition, in 2007 and 2010, men were overwhelmingly more likely 

than women to contribute at such levels (fig. 8). However, fewer DC participants with earnings 

below the 90th percentile took maximum advantage of tax incentives in 2010 than did in 2007.

On February 6, 2014, we briefed committee staff on our preliminary findings regarding recent 

private pension plan formation and statutory contribution limits affecting participant contributions 

to certain private-sector pension plans in 2010. This report formally conveys the final version of 

the briefing slides provided to the committee at that meeting (see encl. 1).

Agency Comments

We provided copies of this draft report to DOL, the Department of the Treasury, the Internal 

Revenue Service, and PBGC for review and comment. The agencies provided technical 

comments, which we incorporated in the report, as appropriate.

- - - - -

As arranged with your office, unless you publicly announce its contents earlier, we plan no 

further distribution of this report until 30 days from the date of this report. At that time, we will 

send copies to the Secretary of Labor, the Secretary of the Treasury, the Commissioner of the 

Internal Revenue Service, and Director of PBGC. In addition, the report will be available at no 

charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 

512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and 

 11 Employee contributions may exceed the limits, but amounts in excess will be subject to income tax in the 

contribution year, but may be withdrawn without taxation in the following tax year.
Page 5 GAO-14-334R – Pension Tax Incentives Update

Public Affairs may be found on the last page of this report. GAO staff members who made key 

contributions to this report are listed in enclosure 2.

Sincerely yours,

Charles A. Jeszeck

Director

Education, Workforce, and Income Security Issues

Enclosures – 2
Page 6 GAO-14-334R – Pension Tax Incentives Update

Enclosure 1: Briefing Slides

We briefed committee staff on February 6, 2014, using a preliminary version of these slides.
Page 7 GAO-14-334R – Pension Tax Incentives Update
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The numbers included here refer to sections of the Internal Revenue Code. The elective deferral 

and catch-up contribution limits apply to employees who participate in 401(k), 403(b), most

457 plans, and the Thrift Savings Plan for federal employees.
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For a more detailed description of our methodology, see our 2011 report at 

http://www.gao.gov/products/GAO-11-333, pp. 44-49.
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Enclosure 2: GAO Contact and Staff Acknowledgments

GAO Contact

Charles A. Jeszeck, Director, (202) 512-7215 or jeszeckc@gao.gov.

Staff Acknowledgments

In addition to the individual above, David Chrisinger; Gene Kuehneman; Kathy Leslie; Sheila 

McCoy; Jonathan S. McMurray; Edward Nannenhorn; Mimi Nguyen; Ronni Schwartz; Margie K. 

Shields; Aron Szapiro; Roger Thomas; and Walter Vance made key contributions to this report.

(131289)
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